Corn and Soybean Issues for 2006

Bruce A. Babcock Center for Agricultural and Rural Development Iowa State University www.card.iastate.edu

Presented at the Bremer County Corn and Soybean Association Annual Meetings Feb 1, 2006

Three Topics

• World trade talks • The 2007 farm bill • Crop insurance

Outline of a Grand WTO Deal

• U.S. gives up some domestic subsidies in exchange for increased market access and a drop in domestic subsidies in the EU • U.S. proposal would require changes in current program support levels

“Traffic Light” Analogy

• • • • Red Light -- “Stop” Subsidizing

Amber Light - Down” Subsidies Green Light - on as Before “Slow “Go” Blue Light – “Loophole” to obtain an agreement

Uruguay Round Agreement: “Traffic Light” turns into “Boxes” • No

Red Light supports

.

• Amber Box contains controlled supports.

• Green box remains.

• U.S. & EU create a Blue Box.

The Current Agreement: Limits on Amber Box payments No limits on Green Box payments No limits on Blue Box payments

Requirements to be “Green”

Payments may not be related to

current prices

.

Payments may not be related to

current production

.

Recipients cannot be required to produce anything

to receive a payment .

30 25 20 15 10 5 0 1996 1997

How the U.S. Met Its AMS Limits

1998

Year

1999 2000 2001 AMS Before De Minimis De Minimis Reductions Actual AMS

Cotton Ruling Upsets US Compliance

• Brazil brought a complaint about US cotton subsidies to the WTO panel.

• WTO panel ruled that cotton spending exceeded allowable levels and that Brazilian cotton producers were harmed by U.S. subsidies – Export subsidies (step 2) should be immediately ended – LDPs lowered world prices, causing harm to Brazilian cotton farmers – AMTA and DPs “do not fully conform” to Green Box guidelines because of restrictions on fruit and vegetable production

Expenditures on Current Safety Net 30 25 20 15 AMS U.S. Limit on AMS 10 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Note: Direct and AMTA payments follow current USTR designation as being amber box following cotton case.

U.S. WTO Proposal

Source: USDA • Amber box : Limit cut by 60% over 5 years • Blue box : Cap at 2.5% of base period value of production • • Loopholes: Cut by 50%, from 5% to 2.5% of current value of production • Green box : no substantial changes, no cap

Illustration of U.S. Proposal

10 5 0 25 20 15 Amber box Current limits New limits Blue NPS de min PS de min

Impact of U.S. Proposal

Corn

Loan rate Target price

Soybeans

Loan rate Target price

Wheat

Loan rate Target price

Cotton

Loan rate Target price

Rice

Loan rate Target price

Raw sugar loan ($/lb) Milk support price ($/cwt) Sugar non-NAFTA TRQ (mmt)

Current 1.95

2.63

5.00

5.80

2.75

3.92

52.00

72.40

6.50

10.50

18.00

9.90

1,229 New 1.74

2.45

4.45

5.39

2.45

3.65

46.28

67.33

5.79

9.77

15.12

8.81

1,984 Change absolute percent -0.21

-0.18

-11.00% -7.00% -0.55

-0.41

-0.3

-0.27

-5.72

-5.07

-0.72

-0.73

-2.88

-1.09

755 -11.00% -7.00% -11.00% -7.00% -11.00% -7.00% -11.00% -7.00% -16.00% -11.00% 61.50%

Impact on Corn Income Market Gross Returns Marketing Loan Gains Counter-cyclical Payment Direct Payment Gross Returns with Payment Net Returns with Payment Baseline Unilateral Change from Baseline Multilateral $/acre 373.18

No compensation No compensation Compensated 0% 4% 4% 12.63

13.80

-76% -53% -86% -67% -85% -67% 24.37

423.97

241.70

0% -4% -6% 0% -1% -2% 66% 2% 4%

Winners and Losers from Trade Liberalization

• Livestock producers would fare the best under a new WTO agreement – They face the largest trade barriers • Corn, soybeans and wheat would lose from lost subsidies but win from higher prices • Cotton and sugar would lose

To Summarize

• Budget cuts or WTO agreements will mean change in US farm policy • Choice could face agriculture: – Keep same programs with lower support prices but perhaps expanded direct payments?

– Opt for new programs?

Structure of Program Payments for Corn

Not Tied To Prod Prod Req.

Target Price Direct Payment Counter-Cyclical Payment Loan Rate $2.63

Regardless Of Market

$0.28

$2.35

“Effective” Target Price

Only if price is here

$1.95

Loan Deficiency Payment

2.50

2.00

1.50

1.00

0.50

0.00

$ billion 5.00

4.50

4.00

3.50

3.00

Market Values of Corn and Soybeans in Iowa

2002 2003 2004 2005

$ billion 8.00

3.00

2.00

1.00

0.00

7.00

6.00

5.00

4.00

Total Market Value of Corn and Soybeans

2002 2003 2004 2005

Government Payments Received in Iowa

$ billion 1.60

0.60

0.40

0.20

0.00

1.40

1.20

1.00

0.80

2002 2003 2004 2005 Corn Soybeans

$ billion 9.00

8.00

7.00

6.00

5.00

4.00

3.00

2.00

Market Value Plus Government Payments

2002 2003 2004 2005

Three Key Farm Bill Forces at Work

• Inertia: Nothing is broke so why change?

• Budget: “Surpluses as far as the eye can see” to “Deficits as far as the eye can see” • WTO: New limits on amber and blue box spending would require change

Alternative Programs

• Conservation Payments • Move to a revenue counter-cyclical payment program – Would cost less for by reducing “over payments” – Would reduce importance of crop insurance programs – Would be able to deliver higher average payments while meeting WTO constraints

GRIP and GRIP-HRO

• GRIP guarantee = Factor*CBOT Springtime Price*Expected County Yield • GRIP-HRO guarantee = Factor*CBOT Fall or Spring Price*Expected County Yield Factor lies between 0.9 and 1.5.

Who Should Buy GRIP?

• Farmers who do not have a representative APH yield • Farmers who are lower risk than that assumed in APH program • Farmers with yields that are highly correlated with county yields

GRIP and GRIP-HRO in Boone County (Expected Yield = 167.5 bu/ac)

GRIP GRIP-HRO Maximum Coverage Per-Acre Total Premium $/acre $/acre 570.34 570.34 33.59 42.20 Producer Premium $/acre 15.12 18.99

Historical Indemnities that Would Have Been Paid Out Under GRIP and GRIP-HRO in Boone County

400 350 300 250 200 150 100 50 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 GRIP HRO

Historical Indemnities that Would Have Been Paid Out Under GRIP and GRIP-HRO in Powesheik County

250 200 150 100 50 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 GRIP HRO

Comparing Payouts from GRIP-HRO to RA-HPO

200 175 150 125 100 75 50 25 0 -25 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 GRIP-HRO RA-HPO

Subsidized rate of return for GRIP and GRIP-HRO

• GRIP and GRIP-HRO are even-money bets: for each dollar in total premiums, farmer should receive a dollar back in indemnities • But farmers are using “house” money to pay their premiums.

• For each dollar of farmer-paid premium, farmer should expect $2.22 back.

Total Premiums Producer-Paid Premium Net Indemnity Rate of Return Corn in Poweshiek County, Iowa GRIP HRO 36.71 16.52 21.98 133% RA HPO 14.05 6.32 4.61 73% Wheat in Barnes County, North Dakota GRIP RA HRO HPO ($/acre) 14.83 6.67 8.25 124% 11.04 4.97 5.34 107% Non-irrigated cotton in Lubbock County, Texas GRIP HRO CRC 49.30 22.19 24.87 112% 46.86 21.09 10.81 51%

Total Premiums Producer-Paid Premium Net Indemnity Rate of Return Corn in Poweshiek County, Iowa GRIP HRO 36.71 16.52 21.98 133% RA HPO 14.05 6.32 4.61 73% Wheat in Barnes County, North Dakota GRIP RA HRO HPO ($/acre) 14.83 6.67 8.25 124% 11.04 4.97 5.34 107% Non-irrigated cotton in Lubbock County, Texas GRIP HRO CRC 49.30 22.19 24.87 112% 46.86 21.09 10.81 51%

Recommendations

• GRIP is ideal for farmers who – do not buy crop insurance, or – who are well diversified within a county, or – who can withstand a farm crop loss

• questions?

www.card.iastate.edu